Tax Watch: Proposal for war bonds gets tepid reception

The first U.S. war bonds to be issued by Congress since World War II are reportedly nearing approval in Congress, but many analysts say that the idea is useful more as a public morale booster than as a significant help to the anti-terrorist effort.

“From a financial standpoint, it’s meaningless. People can buy savings bonds now,” says Henry Aaron, senior economist at The Brookings Institution in Washington.

“It may be, from a psychological standpoint, a small effect,” he says.

Even the Treasury Department appears to be giving the bonds idea a lukewarm reception, although officials are careful to praise the “patriotic intent and sentiment” of the legislation’s sponsors on Capitol Hill. And the bill leaves the Treasury Department to work out such details as yield and maturity.

Proceeds from Treasury savings bonds, including war bonds, go into a general pot of money that can be used for any government expenditure.

But supporters say that bonds sold in the name of the anti-terrorist effort would be an important morale booster, giving ordinary Americans a way to help.

But even if the measure does win quick approval in Congress, it will likely take months for the Treasury to develop a new series of bonds for America’s anti-terrorist war.

The most recent savings bond offering, the Series I bond, took 18 months to put together before its debut in 1998, according to officials at the Bureau of the Public Debt.

You, too, can be a special agent

It’s not exactly “Secret Agent Man,” but the Internal Revenue Service wants to hire more than 300 people in fiscal 2002 to fill positions as special agents in its criminal investigation division.

According to the IRS, the additional resources also will enable the IRS to commit special-agent support to the nation’s terrorism-related investigations and to assist in the air marshal program.

If selected, applicants join a work force of nearly 3,000 IRS agents who perform a critical role in protecting the integrity of the national tax system.

Special agents investigate complex financial crimes, including tax fraud, narcotics, organized crime and public corruption.

Once selected, special-agent candidates attend the Federal Law Enforcement Training Center and undergo a demanding eight-week course in criminal investigation basics, from federal criminal law to firearms training.

Candidates then take courses in tax law, criminal tax fraud, computer fraud, money laundering and a variety of financial fraud schemes. Candidates are also introduced to undercover operations, electronic surveillance techniques, forensic sciences, court procedures and trial-witness training.

Applications are available at treas.gov/irs/ci/recruit.

Cite: IRS Release No. IR-2001-99

IRS proposes catch-up regs

The IRS recently proposed regulations on the requirements for retirement plans providing catch-up contributions to individuals aged 50 or older under qualified retirement plans.

The proposed regulations would apply to contributions in tax years beginning Jan. 1, 2002, and may be relied on until the release of the final regulations.

Under the proposed regulations, a participant would be eligible for catch-up if they were otherwise eligible to make elective deferrals under the plan and met the age requirement.

Catch-up contributions would be determined by reference to statutory limits, employer-provided limits and the actual deferral percentage limit.

The requisite public hearing on those proposed regulations has been scheduled for 10 a.m. Feb. 21, 2002, in the IRS auditorium in Washington.

Cite: Reg. 142499-01

A business sale gets complicated

One of the benefits of investing in one’s own business, at least in the past, was the variety of tax options offered to the owner/investor upon their departure.

Now, however, the U.S. Tax Court has ruled that a couple should be taxed on “dividend income” received under what they believed to be a non-compete agreement.

The sales expenses incurred while selling their business were also labeled as “dividends” by the court.

Cortland Langdon was president and sole shareholder of Bemidji Distributing Co., a wholesale beer distributor. Mr. Langdon sold BDC’s assets to Bravo Beverage Ltd. for $2 million.

The purchase agreement required that $1.2 million of the sales price be allocated to two agreements with Mr. Langdon: $200,000 for a two-year consulting agreement and $1 million for a five-year covenant not to compete. BDC deducted $107,800 for expenses of the sale.

Mr. Langdon and his wife paid income tax on the $1.2 million from the agreements.

In deficiency notices, the IRS determined that BDC failed to report $1.2 million of income that it had received from Bravo, and 59.48% of the selling expenses was a constructive dividend to Mr. Langdon that wasn’t deductible by BDC.

The IRS conceded that the consulting agreement was worth the $200,000 and said the covenant was worth $121,000.

Tax Court Judge Carolyn Miller Parr noted that the amount of the deficiencies turned on the value of the non-compete covenant.

The court rejected the $121,000 valuation proposed by the IRS. Likewise, the court rejected BDC and Mr. Langdon’s $2.2 million valuation of the covenant as unrealistic, because it exceeded the entire sales price.

The court concluded that the covenant’s fair market value was actually $334,000, while the remaining $666,000 of the $1 million represented the intangible assets.

The court found that the $666,000 was non-deductible capital gains income to BDC that was then distributed to Langdon as ordinary dividend income.

Cite: Bemidji Distributing Co. et al. v. Commissioner, T.C. Memo. 2001-260

Not businesslike? Not a business

The 5th U.S. Circuit Court of Appeals, in a brief, unpublished opinion, has held that Harold and Julia Kahla weren’t entitled to deduct losses from their cattle- and deer-raising activity, because they didn’t engage in the activity with the required profit motive – at least according to the IRS’ auditors.

The tax court found that the Kahlas did not conduct the activity on their two ranches in a businesslike manner, noting that they failed to have a formal business plan, budgets or accounting records.

It also said they failed to keep separate bank accounts for their activity; didn’t maintain yearly herd books for cattle; failed to seek expert advice on how to make the cattle- and deer-raising profitable; and didn’t expect their land to appreciate.

Finally, the court found that the Kahlas had substantial income from other sources to offset the activity’s losses.

Cite: Harold W. Kahla et ux. v. Commissioner, 5th Circuit